24 September 2019

ECB: Luis de Guindos: Measures to support monetary policy transmission through banks

Welcome address by Luis de Guindos, Vice-President of the ECB, to the Money Market Contact Group, in which he discusses the changes to some of the parameters of the third series of targeted longer-term refinancing operations – TLTRO III – and the implementation of a two-tier system for the remuneration of excess reserves.

In its most recent policy meeting, the ECB’s Governing Council decided on a comprehensive easing package because the downward revisions in the projected inflation path warranted a vigorous policy response.

The easing package comprised five measures: lowering the deposit facility rate, strengthening the forward guidance on the likely path of policy rates, restarting the net asset purchases within the asset purchase programme, changing the terms of the third series of targeted longer-term refinancing operations (TLTRO III) and introducing a two-tier system for reserve remuneration.

ECB believes that the measures announced last week complement each other and together constitute an effective response to the environment that the ECB currently faces.

These decisions were taken against the following background. First, as a result of continued global uncertainties and their impact on confidence, latest ECB staff macroeconomic projections were revised down. Europe is facing a more protracted economic slowdown than previously anticipated and see persistent downside risks to the growth outlook. Second, inflation continues to fall short of expectations. Headline inflation remains well below our medium-term aim, while core inflation has been hovering around 1% for an extended period of time. Market-based indicators of future inflation outcomes have stagnated at historical lows and the profile for headline inflation has been revised down, leading to a further delay in the convergence of inflation towards our aim. The case for a monetary policy response was clear and a comprehensive package of measures was judged to be the most effective response.

Of the five measures in the overall package, the two may be particularly relevant for banks. These are the modification of the terms of TLTRO III and the introduction of a two-tier system for reserve remuneration given banks’ important role in monetary policy transmission.

Both measures will serve to mitigate the risk that the possible side effects of the ECB’s accommodative monetary policy stance on bank-based intermediation could undermine the sustained convergence of inflation to ECB’s aim. ECB is aiming to preserve favourable bank lending conditions in the euro area to further support the accommodative stance of monetary policy and ensure it is smoothly transmitted to the real economy.

Full speech on ECB

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